In states requiring notice before a pawnbroker can take title to pledged personal property that the debtor has not redeemed, the Ninth Circuit Bankruptcy Appellate Panel held that the automatic stay effectively nullifies the lender’s ability to remove collateral from the bankrupt estate.
The BAP’s June 15 opinion endorses the opposite result reached by the Eleventh Circuit in states where no notice is required and property therefore drops out of the estate automatically if not redeemed by the deadline. See Title Max v. Wilber (In re Wilber), 876 F.3d 1302 (11th Cir. Dec. 11, 2017), rehearing en banc denied Feb. 14, 2018. For ABI’s discussion of Title Max, click here.
The debtor pledged jewelry in California before filing a chapter 13 petition. When the debtor did not redeem the jewelry on maturity of the loan after bankruptcy, the pawnbroker sent the debtor a 10-day notice as required by California law. In the meantime, the debtor filed a plan promising to pay off the loan and thus enable her to retain ownership.
To prevent the pawnbroker from taking title, the debtor commenced an adversary proceeding and sought a temporary restraining order before the 10-day period elapsed. The bankruptcy court granted a preliminary injunction preventing the pawnbroker from taking title by ruling, among other things, that the automatic stay prevented the lender from issuing the 10-day notice and assuming ownership of the jewelry.
The BAP affirmed in an opinion by Bankruptcy Judge Robert J. Faris.
The pawnbroker relied on Section 541(b)(8), added in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act. The subsection provides that property of the estate does not include tangible personal property that has been pledged if the collateral is in the possession of the lender, the debtor is not obligated to repay the loan, and neither the debtor nor the trustee redeems the property within the time specified by state law, as it might be extended by Section 108(b).
Judge Faris said the only issue on appeal dealt with the debtor’s alleged failure to redeem the jewelry before title would automatically pass to the lender.
Under California law, unlike some other states, a pawnbroker cannot take title to pledged property without giving a 10-day notice. Although the lender gave the required notice, Judge Faris ruled that the giving of notice was void ab initio as a violation of the automatic stay’s prohibition of acts to exercise control over estate property or to enforce a lien.
Therefore, Judge Faris held that the “ten-day redemption period never began to run” and “Section 541(b)(8) did not remove the jewelry from the estate.”
Judge Faris said that California is in a minority of 13 states that require notice before a borrower loses title to pawned property. Therefore, he said, “Our holding here only applies where applicable nonbankruptcy law requires the pawnbroker to give notice.”
Judge Faris distinguished Title Max, where Georgia’s pawn statute “automatically [vested] title in the pawnbroker at the expiration of the redemption period.” The majority of states, he said, require no notice.
Significantly, Judge Faris went on to say, “We agree with the [Title Max] court’s analysis” that “pawned property ‘drops out’ of the estate if the redemption right is not timely exercised.” In a footnote, he also said, “We agree with other courts in our circuit that have held that [the automatic stay] does not toll redemption periods.” Therefore, Section 108(b) controls, not Section 362(a).
If the automatic stay did not prevail, the debtor had another arrow in her quiver. Without objection from the pawnbroker, the bankruptcy court confirmed the plan allowing the debtor to pay off the loan and retain ownership of the jewelry. The bankruptcy court agreed and held, alternatively, that the pawnbroker was bound by the plan.
However, the BAP said it would not reach the issue because the panel was affirming on an “independently sufficient ground.” By avoiding the plan issue, the BAP was not required to agree or disagree with a more controversial aspect of Title Max where the Eleventh Circuit held that the lender was not obliged to object to confirmation after having alleged that the debtor no longer owned the property.